Night Watch's Roderick van Zuylen on Marex $MRX

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You're about to listen to yet another value podcast with yours. Me, Andrew Walker. Look,

it would mean a ton. If you could rate, subscribe, review, wherever you're watching or listening to this,

you know, five stars, make a difference. But another one or there. Today, we've got Roderick from

Nightwatch. And he actually, I completely forgot to watch this and mention on the podcast. He

recently took over a cadm copies event, driven monitor. It's not just cadm but he recently took over

that big, quite popular among investors. But he is coming on to talk about Marx. The ticker

there is MRX. And I think you're going to hear this on the podcast. I'm really interested in

Marx. Obviously, I'm interested in most of the stocks I have on the podcast. That's why I have

a month. But I'm interested here because it has all the hallmarks of companies that in the past,

I have looked at and thought, oh, dang, that's interesting. But for one reason, I don't want to

invest. And then the stock is just like an absolutely killer. You know, the two, the one,

just like point vanilla, plain vanilla comp, I would point to you is stone X about four years ago.

But interactive brokers, it's got a lot of rinds with that as well. And we'll dive all into the

podcast. I don't know why I'm rambling here when you can just go listen to the podcast and hear

it all. So we're going to get into that in one second. But first, word from our sponsors.

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well. All right. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker

with today. I'm I'm really excited to have one for the first time. Roger Benzullen from Nightwatch.

Roger, how's it going? I'm good. And thanks for having me. Like I said, big

fan of your podcasts and nice to be on your podcast. No, look, I was telling you before,

this is our first time on a Zoom, but I'm a big fan. You and I've traded notes on mainly

fraudulent microcaps Swiss companies before because I said the f-word we won't mention specific

companies, but I'm just a fan and excited to have you on. We're going to talk about the company

we'll continue in one second, but first disclaimer, mind everyone, nothing on this podcast.

Investing advice, consulting, financial advisor, full disclaimer at the end of the podcast,

all that sort of stuff. Roger, the company we're going to talk about today is Merix. The ticker

there is MRX. I find it to be a fascinating case study with a fascinating investment thesis,

so I'll just pause there. I've got tons of questions, but what is Merix and where are they so

interesting? Merix, they would call themselves a a futures commission version,

which to be a little while to figure out what they're actually doing. But there, the guys,

you call if you want to, if you're an airline or a hedge fund and you want to take oil futures or

other sort of derivatives or next change or off exchange, I think that's the simplest way of

putting it. And then of course, if you call them to, if you're an airline and you want to

you want to take some oil futures, they'll they'll talk you into hedging your FX list or some

interest list as well. So that is a simplified way they're business. And

look, I only IPO two years ago, it's been a PE sponsor, you've had private equity, sell off after

the IPO and two private placements as well. So that's just put some pressure on the name. And I

think the market in general looks at this as a commoditized financial services business.

I guess similar to BGC or TPI cap, which maybe five years ago would have been a fair

characterization, where they were mainly commodity brokers, a very people intensive business.

And it's just grown out to be a much higher quality financial infrastructure business,

where they operate in a very consolidated space. They would point out that 20 years ago there were

100 FCM's and nowadays there's 50, but in reality, if you're not united airlines, if you

unite the airlines, you call JP Morgan or Goldman Sachs. If you are one step smaller,

there's a stone ex, which has been a successful story as a public company. There's Mairex,

there was RJ O'Brien, but they just got acquired by stone ex and there's Archer Daniel Michelin,

which I think is for sale at the moment. So there's actually just three companies you can buy

at the moment. So it's a consolidating space and the demand for we're just trading more futures

every year. So it's a good supply demand. That's all. That's a fantastic overview. I'm going to

note that you and I are recording March 23rd. So the two reasons I know that are A, you mentioned,

if you're trading oil volatility, I know you didn't say oil lightly because you imagine the past

three weeks with all the oil up and down, it kind of shows the need for hedging and I'm sure there's

been a lot of trading though. We'll talk, they mentioned the Goldilocks environment. We'll talk

how it's not a Goldilocks environment. We'll talk that later. The other reason I mentioned the date

is I think they have another investor day coming up on March 26th. So we'll get a posted kind of

right around when they're investing a post, but if they have any groundbreaking news. So just

mentioning the date for that, you mentioned stone ex at the end. You know, I was invested in stone ex

about five years ago when they did for people who've got a long memory. They did the GCAP acquisition.

They bought GCAP right before the COVID. GCAP basically minted the entire acquisition price

during the volatility of COVID. And I was like, oh, these are such cool businesses. You know,

they benefit from volatility all the sort of stuff. It's still next competitor. But the reason I sold

it was I found it to be very black boxish, right? They'd, every now and then they'd have some

write-off where they said, hey, you know, we were trading and we got stuck with like a shipment of

coal or something. And the financials were very difficult to interpret. And I would kind of

apply that here just a little bit where, you know, you've got a fast growing financial that's

doing 25% ROE. And I want to ask a bunch of different questions, but I would just kind of pause with

that. Like I get volatility benefits them. I get this as a fast growing with great RE. But how do

you kind of look at the financials? Like pull them apart. There's lots of different pieces and

lots of different moving parts here. That is a good point. So Stonics is to close the spear and

maybe just briefly, like there's a couple of different sets where the main one is Stonics as

well, one of payment business that's completely different, but they also have physical trade

business. So losing money on the coal shipment is specific for the physical trade business.

There's definitely a concern in the market that there's always potential when there's too much

volatility that there's credit risk. And I think if you look at the history of FCMs,

just looking at what are the biggest losses in history. And there's tons of time when FCM

lost 10 to 30 million just because they sit in between the clearinghouse and at a customer. So

if their customer can't meet their margin requirements, they are on the hook for that loss before

the clearinghouse takes any losses. That's where the real loss comes from. So there's

absent any fraud. A couple of situations where an FCM has lost 10 to 30 million in the past.

And then of course, in 2020, I think ABNUM lost about 200 million and interactive

brokers lost 100 million plus because oil prices went negative. And I think that's a real outlier.

And then we're talking about a worst of the worst. What could happen to this kind of business?

Just to put it in contrast, Mairex has 500 million in excess capital, which is the regulatory

requirement. They would not aim to be close to that limit. They want to have an investment

grade rating if they don't have that. That would infeed close for them. But that just goes to show

that losing 10 to 30 million, which they haven't in the last city and public. That would be a bad

quarter. The worst that has ever happened in this industry absent fraud, losing 200 million,

that would be a bad year. But it's last any year of profitability, so they would retain earnings,

keep their investment grade rating. So yeah, like the worst of the worst, I would see that as a bad

quarter potentially. Probably not even a bad year. Perfect. Let's dive into that a little

bit further. So you mentioned SCM. This is a futures clearing manager. I think it's the

future's commission merchant, but I always mix it up. I even got a little bit sometimes,

so I don't mix it up in the podcast. SCM. I haven't written my notes, but I wasn't. But so basically,

what this is is you know, I'm sure our listeners are familiar with the clearing notes, right? The

CBOE or whatever. These are the people when you trade you and I, we can go buy options with no

credit with no counter party risk, because the CBOE, we actually buy and sell from them and they

kind of settle and that it all out. The SCMs are the people who actually are trading and kind of

taking on the day-to-day risk. That's what the the stone acts or the merits or whatever we're talking

about. Am I kind of laying that out correctly, laying that broad landscape out correctly for the

core business? I think so. And even easier way to look at it is if you and I want to say,

Stokes and New York Stock Exchange, we don't say to the New York Stock Exchange ourselves,

there's an intermediary. It's the same thing. And then they are responsible for, you know, they say,

hey, Andrew, his margins a little bit up, we're worried about they're the one who are actually

going to liquidate my account or have me post margin or kind of manage that. So the clearinghouse,

as you mentioned, like if Maris goes bankrupt, the clearinghouse would ultimately be responsible,

but they're putting kind of the day-to-day risk management on the merits. So that's from here's

what I want to ask you. Again, I mentioned that the front.

America's zone earning, they earned, I think, 27% ROE in 2027, 25% in 2024. If I remember correctly,

stone acts puts up great ROEs. I mean, why working as a futures, why working as an FCM? Why does that

give them the right to earn such high ROEs? Because to me, I get there is a big fixed cost component.

You have to have to see, but it seems like 25% is pretty darn high for something. As you mentioned,

JP Morgan does it. All these big houses, like seems pretty high to get a 25% margin.

Or sorry, we're turning on equity. Let's split this up. Because the other big difference with

stone X is that apps in the last quarter, in which stone X acquired RGO by stone X was more like

15. And Malix is actually a 30 in the last quarters. So it's a big difference for more or less

the same business. And I had the same concern. And in my understanding, the big difference

there between stone X and Malix, the CEO would tell you that he's got 110% of his wealth invested

in that company. So it's conservatively run. There's different levels of trade show. More conservative.

And Malix is a private equity backed slightly more aggressive roller that's been slightly more

aggressive in their bold on acquisitions, whereas stone X has done a bit more organically. They're

investing in an ACME warehouse for precious metals, which is a slightly lower return on a capital

business. Malix has had an extremely successful M&A playbook. They've had a couple of super

successful acquisitions, some of which they bought below book value that's EDNF man. But in general,

companies that are acquired for low prices and where they manage to add a lot of value.

The most recent is a few months before the IPO, December 2023, they acquired TDICO and

the fine blow cuts. And in a period they, like when they bought it, revenues were 80 million.

And in the last like two years later, they were at 250 million. So they three X the revenue.

And this is a business, apparently fine blow cuts are slightly more fixed costs than the

remainder of their business. So margins also sort of doubled. And your ROE ends up being a reflection

of what you paid at your acquisitions. And I think in the case of Malix, there is slightly more

leverage. There is the supply demand dynamic that we spoke about. It's a consolidated space where

demand is growing rapidly. But the ROE is very much a function of just having been associated

successfully in their emanate. That's great. No, again, the reason, as I started researching

this over the weekend, I was like, oh, this reminds me so much of Stonex. And I remember writing

Stonex at the time when I bought it and I hate to keep bringing my personal, but that's how I

view everything. I remember when I bought it, I bought it a little under book value. And I saw

everything you did, right? The CEO had compounded the business at like 20% since founding it in 2002 or

something, bought a little below book value. I sold it a little above book value. And I remember

writing at the time, like, I buy financials below book value and I sell them above book value.

And I thought I was genius, except the stock is up like 4x in five years since I sold it. And

here you say, hey, I think tangible books in the low teens and the stock is around 37. So you say,

hey, it's quite always book value. But as you're saying, 25% plus ROE is growing really quickly,

long runway for inorganic growth that's very accretive. Like you could be talking about a long,

long runway of accretive acquisitions here. So let me kind of poke on that one more way.

What are you seeing? Like this trades at 37 from 2.5 to 3 times book, probably around the 10X

PE like on a kind of discounted year basis. What are you seeing that the market's missing here?

So I think MyRex trades at 7 to 8 times PE on what they're going to earn this year. First,

a stone X that is about 12 to 15 times in that range. And then I think just given how rapidly

stone X has been compounding book value and earnings, I think 12 to 15 times a little bit low.

But there's always a black box nature to it. Right? And the market is never going to be fully

comfortable with the credit risk and is never going to fully understand when they're going to

make a lot of money. So maybe they'll never get it to any times earnings. I think it deserves.

But there's multiple uplift, 17, 7 times to 12 to 15 times. And some fundamental reasons,

some technical reasons. Let's just quickly get the technical reasons out of the way.

Most importantly, are all the private placements that we've seen in the last two years.

There's been a lot of shares that the market has had to absorb in just two years.

With most importantly, they're still 17% owned by private equity. They did their last

private placement in April of last year. Everybody expects them to do private placement

around now actually two weeks ago. That's why the shares dipped a bit. There were rumors that

they were looking to place a big block. Nobody wants to buy a week before there's going to be a

17% placement. So having that out of the way, that's going to help. I think having a slightly

longer cycle record of being publicly traded. Like I said, it's a black box market is trying to

figure out how does this operate during a tariff, then it turns out we're trading more,

so they benefit from the volatility. But Q3 of last year was a slightly lower volatility period.

Do they still manage to go earnings? The answer is yes. Like now we're in an extremely high

volatility environment and they point it out. This might be a little too much to actually earn

good money. We don't want to stress on our customers either. So the market is trying to figure out

when are they going to make money? And I think the answer to that will be pretty much in any

environment. Some environments a bit more than others. So I think that will help over time.

Can I pull on two things you just said there? The first I want to pull on, you mentioned PE

overhang, right? And there have been a lot of secondaries here and they still are in 17%.

And on the one hand, I get a PE's got to, you know, they built this. They've had a very successful

run and they need to exit at some point. But on the other hand, you know, you do this long enough

and you see PE exiting and you do it long enough and you see PE exiting and you know,

six months later, the business class a year later. And you start to say, hey, maybe there is

something to all these people who say you don't want to buy, you know, PE back companies or you

don't want to do secondaries. Like they really do put everything, paint a glossy light on it as

they're getting out and then you're kind of left holding the bag. So why is PE exiting and why is

that kind of not a worry here? So this started, I think it was founded in 2005,

but the PE firm is exiting. It's a JRJ or RGR logo. They they've been invested since 2009.

Fine is shuming. Just given the time frame. They tried to IPO this in 2022 already.

That IPO failed. That's also maybe something to get into. But there's exits on PE vehicles, right?

It was one of the higher two concerns when I bought this around the IPO two years ago.

One is I don't want to buy when PE is selling. And the second one is I don't want to buy low labs

in financial services just because it's, you know, I would work, you buy people and people are

just loyal if you don't pay them enough. That concern has been unfounded like they they've

seven X their their earnings in the last five years. And that that included in the last two years

after the IPO date. They just continue with 30% plus growth rates each year. They continue to

execute weeks in the end as what matters. Including the second question I had on this.

Product signature, but I do have another one. When they're buying cup, like they've done a lot

of a creative growth. And you mentioned, you know, I think the old model was when you go buy

something, you really worry about, hey, the people leave, people are disloyal and you lose that.

I think that's changed a little bit and they've done a really nice job of buying stuff. I mean,

look, they buy TV Cowan's prime business. And if TV Cowan doesn't exactly lack for resources,

but within two years, they turned it from 87 million of revenue to, I believe they said at the

most recent call, 250 million of revenue. What how can they creatively grow these businesses

like this? Sort of climb focus business is sort of a new business. So it's an outlier. So

let's start with the core business. A lot of the acquisitions that I've done in clearing.

And they've moved like 10 years ago, they were guys that were trading metals on the enemy.

And they moved into brokerage on energy, a lot of which is OTC and it's very competitive

business. It's not a good business to be in because as you know, they call it voice trading,

but effectively it's you tell the you tell your guy in Bloomberg what you want to trade that day.

And if you're a hedge fund, you're going to trade with the guy that took you out to a fancy

restaurant yesterday or took you to the strip club. And if the guy leaves, if the broker leaves,

you might just shift your trades to another firm. So there's you see that between BGC and TPI

cap, there's always a lot of competition for brokers. And that just makes things inefficient

because they go unguardingly for a year. It's not the business you want to be in. And

what they what they really what improved the quality of the business is when they moved into

clearing, which is a lot more tech enables. They'd say it takes them one or one and a half years

to onboard their business on the CME or ICE. And it takes their clients half a year

to onboard their system. And a lot of that is compliance. And there's a lot of tech. And I'm

too much of an outsider to know exactly what what the tech looks like. I just know it's

it's more complicated. And that's one of the reasons the business is consolidating.

It makes it does make total sense, right? Like if you think and again, I'm an outsider just like you,

I'm not running a huge hedge fund with thousands of millions of trades a day. But if you're

if you join them and they're doing all your clearing and there's like that's your day in books.

And if you're switching to someone else, I mean, if you're the if you switch on day one and your

trades don't settle that day. Cool. You saved a little money and you blew the entire firm up,

right? You no longer know what your risk management is. You're probably getting red flags from

auditors, red flags from the SEC. Your clients are up and armed. So this is like mission critical

stuff that isn't that that expensive. Now that's not just that's not to say it's the strongest

lock-in in history, but it's quite strong. And I'm sure they have, you know, you think if

an auditor has good pricing power up five percent a year because you don't want to change like for

in line to Deloitte, you want to talk about suddenly every day hundreds of thousands streets.

Well, boy. So yeah. Definitely on the prime broker's business, I believe if you have a

prime broker that you're on a hedge fund, you include it in your fund documents and it's extremely

expensive to change the fund documents. Yep. Sorry, you're elected and there's high switching costs.

If I can continue on that M&A playbook, please, I'm sorry, I cut you off. So there's I think three

transformational acquisitions that TDICO, when it's fine brokerage and Rosenfeld Collins, I think

it was 2018, 2019. That's what got them started in the clearing business that made them an FCM

that was registered with the CFTC in the US. Generally, the M&A playbook that they do is they've

got the clearing business with a lot of skill. Then they go to the Middle East and they buy a

brokerage business over there, which effectively means they buy client relations. And in some

case, there's capabilities to trade on another exchange where they haven't onboarded yet. But generally,

you buy client relations. On day one, one of their recent acquisitions, I think on day one,

had a 50% profit uplift because they have lower clearing fees at CME and I. They have skill.

That's not difficult synergies that you need to try and get over the next couple of years.

Day one, they manage to go profitability by 50%. Then when you have those customers,

you try to do more business with them. Like I said, you have the airline and you try to sell it

not just oil futures, but in the last five futures. So that's sort of been the playbook. And

the value add is high and the multiples that are paying is pretty low. They've done some

acquisitions now in market making, we're in like three or four times earnings. And then there's

growth after that. If you're paying that sort of multiples, it's not hard to see why 25%

are we or better remains possible. Can I pause you on the multiples? The three or four

or six multiples, I definitely hear you. But this was like the synergies you talked about the day

one uplift is very reminiscent to me of the TV, the cable networks of all, right? You had TNT

merged with USA and then they would go and say, hey, sorry, it wouldn't be TNT USA. You have USA

emerged with NBC and then they go and say, hey, you know, concasts used to pay five cents per

sub for USA. You black USA out now, you're back, you're going to have to black NBC out and it goes,

you know, what was five cents becomes ten cents. So day one, I totally get that. But the counter

is that is, hey, you know, NBC and Fox would both have that same synergy. So they should compete to

drive the price up to kind of price the synergy out here. You know, you've got Marx and you do have

other buyers here. So why are people selling for kind of three or four X? Why isn't it just getting,

you know, Marx says, oh, my God, we have synergies. Donuts says, oh, my God, we have synergies.

Three other firms say, oh, my God. And they kind of just did the price up to kind of counteract that

synergy if that makes sense. So to answer that is to answer the question, why is this space consolidating?

Why did the number of registered FCMs in the US get put in half in the last 20 years? And

on the one side, you have banks which are a basil three or basil four regulators and they have

high capital requirements. So they've been exiting. The non-bank FCMs don't have that capital

requirement. Marx would point out like, hey, we still like to be investment-grade and we still keep

gaps on all the side. But anyway, banks are exiting this space on the lower ends because it's

becoming more tech-enabled. The compliance costs grow up, the tech-investment requirements grow up.

So when you're saying somebody else can outbite you, I mentioned them earlier, there's

Zonex, there's Marx, and there's Archudennial Mettelent, and everybody knows that ADM is for sale.

I don't buy it is. There might be private equity if the valuations become attractive enough,

but they don't have those synergies. So it's just not as competitive to bid for those companies.

Let me ask you this is different. If this business is so good, right? And you see it in Zonex

results, right? Mid to high teams are always. Marx a little bit more levered, but 25% plus

are these. Why is ADM for sale and why are people not jumping at the bits grab that if you've kind

of got this consolidating business where you've got this really interesting dynamic where

the largest players are actually regulatory priced out of this and the smallest players are

getting off X priced out of this. So why wouldn't that just kind of be the nirvana for a variety of

buyers? So specifically, ADM, I wouldn't know them well enough to comment on their specific

situation. RJ O'Brien just got acquired by Zonex, and I've asked both of the companies, like,

did you bid for it or didn't you when you get completely different answers, where Zonex would

say that it wasn't a competitive bit. They just had a relation with RJ O'Brien, which was a

family on business if I'm not mistaken. So they were the only like RJ O'Brien wasn't interested

in getting acquired by Marx, according to Stonex. And Marx would point out that Stonex is being

like six to nine times earnings to your post synergies because they're not buying a small

focus in the Middle East. They're buying one of the last remaining big firms. And they're like,

why would they pay six or nine times for one of those bigger platforms if you can buy three

smaller ones for three or four times? It's a different mindset there. And they point out

also something we'll probably get to. And that's Marx already felt like they had enough

interest rate risk in a portfolio. RJ O'Brien comes with additional interest rate risk. So

both companies could have acquired it. But only one was really interested.

Already acquired. He was only interested in getting acquired by one.

If that helps, if that answers your question.

You know, it also strikes me that if the industry has truly gone kind of from four

viable scaled players to three, the, you know, yes, Stonex buys RJ and gets the benefits of

the synergies there. But everybody else kind of gets the benefit of a more rational, more

oligopolistic firm. I mean, I said I was going to ask a question earlier and I want to turn

back to it. You know, Goldilocks environment. Again, I just remember Stonex. They buy GCAP

and I think they strike the deal at the end of February of 2000. And then March 2020,

and then March 2020 happens. And I'm sure everybody remembers what happened March 2020.

And GCAP because they benefited from volatility actually earned their entire market cap in the

month of March 2020. I remember that very well. Marx comes, you know, their Q4 earnings call,

which happened a couple of weeks ago. I would have guessed, you know, given everything that's

happened in Iran with, you know, oil going from 60 to 120, whatever you call it, you know,

multiple up down, up 10, down 10 days and everything. I would have guessed they were absolutely

minting money in this environment. But they kind of came on the call and said, hey,

there's a Goldilocks level of volatility, not too volatile where our customers are kind of like

blowing their brains out. But, you know, we want some movement in stock. And they said,

we're way past the Goldilocks level. That kind of surprised me. So I wanted to just ask like,

why is it this high volatility isn't just complete Nirvana for them? And how do you kind of think

about that? It surprised everyone. That's why this year applies is down. They did say it's

not Goldilocks, but we're still growing in line with our usual algorithm. So it's not Goldilocks,

but we're still growing at least 10 to 20% is what they were effectively saying.

And it's always, the market is, including me, is still trying to figure out like what is the

right level of volatility? The arguments by this amount of volatility would be too high,

is a liquidity requirements of customers go up. And instead of just posting more margin,

maybe they just deal as their book, which means some clothing trades and taking a bit easier.

Plus if you're an airline and you were waiting to hatch, you know, oil, maybe you're not going to

hatch it for the next two years. Maybe you'll take a very short contract just because you don't

want to pay up. That was their explanation. To me, that sounds a bit like the furthest income.

If he's choosing to only hatch for the next couple of months, he's going to come back in two

or three months and hatch more. The way I would look at it, the last five years, in which they

7xed their net income, have you put it all the time in the market? And that's benefited them.

The best way to look at that is prior to COVID, the amount of futures being traded globally.

Used to go about 5% a year. And that has grown in the double digits in the last five years.

So that went from 5% to 12%. And I think that's the function of the higher volatility we've seen

with Ukraine, with COVID, with everything that's happened. And maybe because they're doing a better

job at cross-selling us into other structured products. So whether there's more trading activity

exactly today, it's not the kind of company that needs to make all of their earnings in one or

two weeks of a year. Like you would see with a flow trader or something like that. We can still see

in the data, January and February, the amount of futures on CME and I's were plus 12% a year on year.

It's trending well. And energy and metals are way higher than that.

No, I just, it is friends, but you mentioned metals. And that's a great call because they said,

hey, they've also in January. And you completely forget that's when silver is doubling inside

of a couple weeks. And then you've got since then, you've got the multiple pox. So oil is kind of

the headline right now because it's kind of just top of mind with the war. But there was plenty of

volatility in every other metal and commodity for the most part in the first few months of the year.

Go one last thing, buybacks, popular topic for the past few years, I would say, with this company.

You know, hey, when do you think about buying that stock? And I think they pretty much largely

resisted it. And when you're running a business with 25% ROEs, it's probably right not to buy

back stock when it's trading at two and a half times because every drop of organ, your market

capacity anticipating continued organic growth and every drop you can do creates a ton of value.

But what do you think about just like buybacks and capital allocation here?

So they haven't spoken about this publicly, I think. But when they, they're a foreign entity listed

in the US reporting on the IFRS or the foreign entity, they would need Cheryl's approval to do buybacks.

They're British, right? Yeah. Why are they British? Is that a function of mergers or just

function of history? Because it seems like this should be. It's an actual British company. They

would talk to you with the Bosch British accent. Their biggest office is in London somewhere.

It's a British company. They tried to IPO in 2022 in the UK. And one of the two reasons it failed

was because who wants to buy British stocks, right? Nobody wants to trade in the UK. So I know

it is in the US, but they still have to require, like they need Cheryl's approval for buybacks.

Their British PE owners didn't want to give this. I don't know what. Their British PE owners

are no longer in charge. They gave up their board seats. They will have sold out by then.

I'm very confident. I could be wrong. I'm quite confident that they will ask for buyback

authorization at the next AGM, probably May, to at least have it. There was a short salary

report last year. I was very much unfounded. They would have liked to have buyback in place,

like the only thing they could do at that time was go around and everybody in the company had to

chip in one million dollars to buy back some shares. And they would have liked to do buybacks.

But they didn't have the authorization. And I think they will have to make.

Let's talk about the short salary report. So that comes out in early October, 2025. It is

NINKI. NINKI research. I've never heard of them.

NINKI research. They come out in October and we can talk about the company's response

and everything. But the piece is pretty scared. It says, hey, unconsolidated entities,

lots of related party dealings that are getting tracked. It mentions reduced scope from the auditor

is one of the things if I remember correctly. It's got a lot of stuff. Let's just talk about the

short report upfront. And we can also talk the company's response.

Yes, sure. Like you said, it's a difficult business. So it's quite easy to make a report that

looks scary and scares people out of their position. My first question was this. I worry about

black box, right? And when you have a black box rightly or wrongly, it is very exposed to a

short salary report. Now, hopefully it's a good one. But you know, black boxes, short salary reports,

match mean heaven. It took me more than a day to actually figure it out. It was like 40 pages,

which pointed out various inconsistencies. Some of them I was surprised. Like someone that must have

done pretty well into a company to find those. Yeah, how those two inconsistencies, I would say there

were two arguments that if they had been correct, I'd be worried. Yep. The most important

there was it would point at two unconsolidated entities. Luxembourg Seacups, but it's like here,

you would have a VIE, but it's like a fun structure for which they can do their market making.

Maybe one of them was used for for the issuance of structure products. And it would point out like,

hey, the other two designs and there were there were entities and the 2022

financials weren't audited until the middle of 2023. Like inconsistencies that shouldn't exist. But

I think the main allegation there was they they would claim that they were unconsolidated,

that Marijks was trading with them, that Marijks was booking fake profits with their own entities.

Yeah, that was so pretty bad. Management address during the call and the first thing I said is

we consolidate those entities. If you consolidate them, the entire argument is off the table.

It doesn't exist. You'd still prefer that they didn't take 18 months to to audit an entity,

but then if you learn the background of those entities and it's a roller like they've done a lot

of acquisitions and what happens if you do a lot of acquisitions, you end up with I don't know,

hundreds of legal entities and some of them take time to to get rid of to consolidate.

They aren't actually using the entity. We're talking about two funds with two million US dollar

inequity that they're not using. They told me they're just to get the confusion,

gone, they are in the process of shutting down and I haven't heard about that so I'm not sure

whether they still exist or not. Bottom line is they were fully consolidated so there's no

fake profits being booked. That's the only thing that matters here. I think the other one was

there. There were claims like hey, there's not even any free cash flow.

I didn't encourage anybody to just open financial statements yourself. Look at the free cash flow

statements. They only report that twice a year because it's a British company and not a US

company. Maybe they should give that free cash flow statement every quarter, but they're definitely

as free cash flow. We're talking about a financial with a complicated balance sheet so sometimes

there are hedges working as a tailwind, sometimes as a headwind in the two years prior to that

short report. It had been a tailwind for free cash flow, but hey, in the last six months it's a

headwind and they're still plenty of earnings. If I remember correctly another thing that was

scary on the free cash flow, I'm trying to find the specific table with they said, hey,

they're booking financing on your free cash flow statement. Anyone who's familiar with one,

you have CFO cash flow from operations, cash flow from investing, cash flow from financing,

they're saying, hey, they're booking cash flow from financing as a cash flow from operations

and that kind of breaks the thing. I think the company came out pretty strongly and said, hey,

because we are a finance firm, this is typical. By the way, if you read footnote number one,

it is very clearly broken out. You can make your own assumptions. It's not like we're trying to

sweep this under the rug. There were a few other scary ones there. There was a British entity

that they acquired where the short sellers said, hey, they didn't report a looming fine from

the regulator. I believe you could actually confirm wrong or you can tell the story if you remember it,

but I believe the company said, yeah, we didn't report it because we structured it as an asset

acquisition so that we didn't buy that legal entity so that we didn't. We knew there was the fine.

The seller knew there was the fine. We left that liability with the seller. There was a

scope question. They said, hey, Deloitte's pulling back their scope and the company came and said,

yeah, that's because E and Y is taking it over the scope. There were some other scary things that

the company, I think, addressed well, I'll pause there. Was there anything else in the short

reporter or anything that you wanted to mention? You answered your own question on it first point.

I think in general, what I liked about the response, I think it's just a kind of company

similar to interactive brokers that has benefited from being public.

The amount of name recognition and transparency that gives them in the market as a prime broker

has helped them in the last two years and they point out like, well, we benefit from being public

and clearly there's also some negatives because you get shortly ports like this that you have to

do, but in the end, everybody's allowed to say what they want to say. I personally

as a financial market participant, I feel like everybody's allowed to say what they want to say,

but if you want to make such complicated arguments, why don't you do it after hours and not five minutes

after the market opens and I'm not, I don't know this person. I'm not sure that even happened,

but I just see it so much nowadays. Before I've had time to read and understand the report,

I think most of the time they've already covered part of their position. That's a personal

frustration I'm dealing with, but let them say what they want to say and it keeps us sharp.

I learned a bit a couple of new things about the company and the company needed to communicate

a bit better on certain things. No, look, on the shorts are treating, I mean, I don't think they're

the only one to point out the timing and everything, but on the company response, I mean, I just,

when I was trying for this podcast, I was like, oh, no, black box financial with a short report,

this could be scary, but the thing I really liked was I liked how the company responded, right?

The short report gets published a couple of days before earning, so the company is a black

out period. They just publish a thing that says, hey, we think this is misleading, we'll talk about it,

then they do the earnings call. On the earnings call, they say, look, we respect short sellers,

we're just going to rebut the two kind of scariest points as you started talking. Then the next day,

all the top brass kind of buy shares on the open markets, would you like to see more? Sure,

but everybody buys shares. I thought it was an ideal response. They didn't yell and cry about

short sellers. They kind of just address the most pressing things and look, as a financing firm,

this question gets asked, right? The reason financial firms are so scary when they get short is

A, their black box, but B, the customers say, yeah, like we have our prime and our docs, but if

if there's a 1% chance or prime is going under, we're just going to move because we're not going to

get zeroed out here. So, you know, you worry about the customer risk. They came out and said,

look, we had open conversations with other customers. And for what it's worth, if I remember,

say we've got a global hedge fund, you've decided to move more business to us. So I'll pause

there if there's anything else. I think we discussed it. They handled it well. There's zero

relevance of the short report going forward. It's just business as usual and growing earnings.

And like what you want to do with complicated black box financials, you want to sort of verify

in real life that the business really exists and that they're really glowing the way they aren't

glowing. And funnily, I started my hedge funds about two and a half years ago when I moved to

the US and in Maddox, C.V. Corwin, which was only just been acquired by Maddox a month earlier.

They were the first one to reach out to me and like, hey, if you already picked a plan broker,

a lot of firms moved out, like started reaching out when it was already too late. Like,

nobody's going to pick a plan broker five months after launching a fund.

Now, you can see in real life, if you're in a financial market, I know some people who are moving

their plan broker business to Maddox, they really like the short lines that they offer.

I see people moving their business there. So you can sort of verify in real life business

exists. They're glowing it. They have a very well, very motivated sales force that is reaching

out to a lot of people. I saw that example in your notes that you sent me to prep, but I didn't

want to bring out an anecdote. But I thought that was a really cool anecdote. And sometimes it's

that little personal insight that makes things. Let me admit this. We've talked, I've said a few

times, look, hey, trades at two and a half to three times, well, 25% already. You say, I think this

should trade for 20, 20 times EPS and it's kind of trading at seven rate. How do you value this

company? How do you think about the value? Because the other answer is like, they say we can do 10%

organic plus 10% in organic. If you can do that for a long time, like, forget 20XE by right now,

it should be valued like the next Berkshire Hathaway. So how do you think about the kind of

fair value here? I mean, just because I think it's worth 20 times V doesn't mean I'm ever going to

get it. I've accepted that. I do think, and I guess it's got a higher, they date with 30%

RLEE, Stonics does now 20%. And maybe with slightly more leverage, does it deserve at least a

Stonics multiple? I think so. I think it will end up trading somewhere between 12 and 15 times

maybe not the next couple of months, but I'm not in it for the multiple expansion. That's a nice

bonus. If they do continue to go earnings, anywhere close to the rates they've been going, like,

yeah, they're going to 10 to 20%, but they've been to 130% plus. If anybody goes earnings at that

rate, you'll make a good return without a multiple expansion. And at some point, you go from seven

times to 14 times that push your IR quite a bit, but it's the earnings curve that matters more.

It is nice when you've got that earnings growth tailwind, right? Because you can always just say,

hey, every year, 20% more, 20% more. Ask you one last question. This is, if I put aside the

black box kind of risk here, right? Which obviously is scary. But if I put that aside, what would

keep you up the most at night about this business? Interest rates. They were points to a very low

sensitivity. Like if the Fed funds rate drops by 1% at points, they would lose about 5% of their

earnings. And the reason that that's quite low is so customers post margin and they were Fed

funds rate on that effectively. But they shared that. If we are similar to interactive

brokers, they just take 50 basis points. They, for 60% of the clients, they take like 150

basis points from average, depending on the size of the client, and 40% of the customer they take

all of it themselves. And so with a 60% of the customer, it doesn't matter if the Fed funds

rate drops by 1%, until we go below 1.5%. They would point out like, we're not worried because

we've got that hatch. They've got interest rate hatches, about in two and a half years basis.

But in a situation where the Fed funds rate goes to zero percent, and the hatches are all

of two and a half years later. That's a decent chunk out of earnings. The reason that even though

that's my main concern, and I'm still invested, is they've managed to grow those balances at

a really high rate. Two years ago, I think they had like 13, 12, 13, 14 billion of client

balances there now at 20. So like 50% growth, they continue that growth that offsets quite a bit.

The other thing is it's a consolidated market that we spoke about. When interest rates went up,

customers approached them and said like, hey, you're making so much money on our balances,

maybe you should share a little. Both Stonex and Madex are saying that they're quite confident

that if the Fed funds rate drops below 1.5%, they can actually go back to decline and say like, hey,

we gave you more money on the way up. Now we're going down. How about you start being a little

slightly higher spread on the swap that we're selling you? So they can probably compensate quite

a bit through commissions and client brokers business. You've got the same interest rate dynamic

with a lot of the retail brokers, but they're the argument as always. If interest rates drop,

we start trading more. I think that same argument goes a little bit for the plan brokers business

less so for the clearing. So they'll make it up on full of human pricing, but Fed funds rate under

1.5% would be negative. Well, I have good news for you. A month ago, you might have had

some worry about Fed funds rate, but you know, I don't think, again, we are recording this on

March 23rd, but the Fed funds outlook has changed pretty materially in the past couple of weeks,

so I've good news for you on that risk. No, and look, I think the younger me would have kind of

said the Fed funds risk and been like, well, look, people are going to look through this, people

are going to normalize. But you know, the older me says, it's not lost to me that interactive brokers

in Stonex, there were a lot of other things, but they really start taking off in kind of mid to late

2022, when how long did IBKR rate rail against the system say, hey, interest rates are zero,

we're making nothing on these huge margins. As soon as interest rates start taking up, I mean,

IBKR has like a 4x over three or four years since then. I might be a little bit high on that,

but IBKRR works, Stonex works, like it's not lost on me, interest rates going higher,

just a huge tailwind for all these things. And like that's when the market really starts

rewarding them. So I think we've also got kind of a proof point in the market, if that makes sense.

Right, this has been great. Anything else you want to talk about, whether it's

Marx or the Swedish small, no, we're not going to talk about Swedish small cap frauds. I have to

keep reminding myself, but anything else we should be chatting about? I think we cover this company

quite well. That's what I like to hear. Well, look, I really enjoyed having you on. And again,

I've just, uh, through our Twitter DMs and stuff, I've had a lot of respect for all the work

and everything you've done. So appreciate you coming on, and we'll have to have you back on

sometime soon. Thanks. Thanks for having me. A quick disclaimer, nothing on this podcast should

be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned

during this podcast. Please do your own work and consult a financial advisor. President Barack Obama.

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